Why Economists Don’t Understand Accounting, or Business

I just searched Harvard, U Chicago, and a few other top econ departments’ course offerings and major requirements. The string “account” barely appears.

Chicago says quite explicitly:

Courses such as accounting, investments, and entrepreneurship will not be considered for economics elective credit.

Much less requirements!

No wonder so many economists:

• Have such profound misunderstandings of the National Income and Product Accounts and the Fed Flow of Funds reports (and how they relate to each other). Nobody ever taught them how to read or understand the darn things.

• Have such crazy notions about how producers think when they’re setting prices.

Way back in the 70s, I was staying with my girlfriend as she was finishing her senior year at one of the Seven Sisters (female Ivies). Very smart girl. She was on her way to Wharton for her econ masters, and would go on to become the CFO in a NYSE-listed company.

As part of her entry requirements for Wharton, see was taking Accounting 101 at a local community college (her school didn’t offer anything of the sort), and after several months of the course, she still hadn’t picked up her homework for that course (which was extremely unlike her). One afternoon as she crammed her “important” courses, she asked me to do the accounting homework for her. I said I’d never done any accounting, but she assured me it was simple, and indeed, I finished it off with little effort.

I thought of this again when I first encountered MMT several years back, which of course insists on rigorous adherence to accounting identities. Of course the mainstreamers never thought of this stuff, I thought. They all think accounting is beneath them.

I suspect the reason most economists don’t study accounting is that it isn’t all that relevant to their research areas. Where it is relevant, it is studied. E.g., I am taking an international macro module this semester. The lecturer is a prominent academic who used to work in the research shops at the IMF and the WB. We study aggregate income and flow of funds accounts. The first two sentences of the first chapter of his textbook actually read,

“An integrated and consistent set of economic accounts is a prerequisite for any modelling exercise in macroeconomic analysis. This chapter discusses the relationships between national accounting, stock and flow budget constraints, and the consistency requirements that macroeconomic models must satisfy….”

Or think of this: if you look back through the taught components in these PhD programmes, you probably won’t see many modules that cover calculus, analysis, dynamic programming, probability theory, measure theory, etc, etc. Yet somehow, people who need to know these subjects find the time to learn them.

This reads very much like another effort at validating your own views, rather than anything like a legitimate effort to discover what’s true. You already “know” that economists have a – what was that word? – “profound” misunderstanding of national accounts and flow of funds data. I’m sorry, but you are…who? You know this how?

The national accounts and flow of funds data are, in fact, an accounting system. They are not, however, taught in accounting courses. They account for income and spending throughout the economy, and are part of economics. Economists created them. You claim that “so many” economists “profoundly” misunderstand, but that sounds pretty hollow. “So many” could be 4% of the total. “Profoundly” could be what you say to the other side of an argument on a blog to shut them down so you can trot on with your own idea.

Where, sir, is there any proof that economists – in general – misunderstand national accounts? And why on earth would “entrepreneurship” help in understanding national accounts?

Many economists have allowed their thinking to grow flabby. Many have not. It’s not at all clear that the absence of “entrepreneurship” from their studies has anything to do with who thinks badly about economics, and who thinks well.

The national accounts are almost completely ignored in mainstream econ. How do we know this?

Because Wynne Godley isn’t revered as a saint. If national accounts were important to econ, then someone would have come up with Godley’s system back in the 1960’s. His work is incredible and hard to do, but slap across the face obvious if you’re really thinking about national accounting seriously.

It’s the obvious step, to get more detail and have it all add up in a coherent manner. It’s what a competent CFO would do if he was looking at the accounting of a country. Yet nobody had done it before Godley, and he’s hetrodox today.

Do you see any debate in the mainstream about what’s happening in the Godley model? No. How about a reasonable and nuanced discussion of the twin deficits of Government and Current Account? No.

TC, Maybe I should expand on that slightly. If you check the literature on CGE / AGE / DSGE modelling, then there is attention paid to national and flow of funds accounting frameworks. In other words, this goes on in throughout macroeconomics–it’s not limited to international macro. But it’s not the sort of thing that gets much attention in blogs. (In general, as a parenthetical aside, I don’t see much of a relationship between what gets written about in blogs and what goes on in mainstream academic research).

It might still be the case that economists don’t understand accounting of course, but I don’t think it can be because they’re not paying any attention to it.

I thought of this again when I first encountered MMT several years back, which of course insists on rigorous adherence to accounting identities. Of course the mainstreamers never thought of this stuff, I thought. They all think accounting is beneath them.